Weak economic climate hinders Taiwan banks’ profitability

Taiwan's banking sector remains one of the least profitable in Asia with slim prospects for near-term profit growth. This is due to the slow pace of economic recovery. In addition, the industry's thin earnings level supports only a modest ability to absorb incremental credit costs under the current unfavorable economic climate. That's according to a report titled "Banking Industry Country Risk Assessment: Taiwan", published by Standard & Poor's Ratings Services.

"Taiwan banks' net interest income remained at a fairly low level in 2008 and the first half of 2009, due to fierce competition and a prevailing low interest rate environment," said credit analyst Eunice Fan. "We don't expect the situation to improve for the next one to two years unless there is substantial industry consolidation and revenue source diversification."

According to the report, the current economic downturn is likely to further strain the banking system's already weak profitability. Many domestic banks look set to report marginal profit results over the next few quarters, and some may even see losses as well as capital erosion after absorbing increased credit costs. Moreover, Standard & Poor's expects individual banks' credit profiles to diverge further as the weak economic climate continues.